Investors are rethinking whether, and how, to invest in Apple, as some see the beginning of a transformation from a growth stock to a value investment. Steven Russolillo joins Markets Hub. Photo: AFP/Getty Images.

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Apple's iPhone 5 sales were very strong in December but with the stock down 28 percent over the past few months investors and analysts are left with the question whether those sales numbers are going to drop in the upcoming months. MarketWatch's Dan Gallagher reports. (Photo: Getty Images)

The Los Angeles firm had bought Apple in mid-December in the low $500-range, its first foray into the stock. Analysts there figured that a decline in the shares had made it cheap enough for a value investor like RNC Genter.

But this week's drop sparked "a change of thinking," Mr. Genter said. As the shares fell below $500, analysts met to discuss whether the firm should sell and cut its losses.

In the end, RNC Genter elected to keep its position in Apple for now. "We haven't made any decisions yet, but we're assessing the situation," he said.

RNC Genter's dilemma is widespread. Investors large and small are grappling with what could be a watershed moment for Apple. In many fund managers' eyes, the recent decline could mark Apple's transformation from a fleet-of-foot growth stock—one that is seen as risky but whose growth prospects could lead to big gains—to a more plodding value stock—one that trades at a low price relative to earnings and offers regular payments such as dividends.

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"Apple's stock has been a little confounding from a definition perspective, but it certainly appears to be transitioning from a growth stock to a value stock" said Toni Sacconaghi, a technology analyst at Sanford C. Bernstein & Co. in New York.

As analysts and investors wrestle with the implications of whether to buy or sell, and when to do it, the situation is becoming more acute.

The stock has dropped 28% from its closing high of $702.10 reached in September, wiping out about $200 billion in market value, roughly the equivalent of Pakistan's annual gross domestic product.

The stock closed below $500 this week for the first time since February. It has fallen 4.9% this year, compared with a 3.3% rise for the Standard & Poor's 500-stock index. On Wednesday, the shares rose $20.17, or 4.2%, to $506.09.

An Apple spokesman declined to comment about the stock price.

Many investors, including Mr. Genter, said they are awaiting Apple's earnings report next week to make a decision on whether to buy or sell.

At the crux of the debate is whether investors believe Apple's earnings growth can continue. The company is so large now—revenue is slated to exceed $190 billion in the year ending in October—that such outsize gains in its top line may be hard to achieve. That makes it unattractive to many investors seeking revenue and share-price growth. At the same time, many value investors aren't convinced the company is cheap enough, even though its price/earnings ratio is 10 times, compared with 13 times for companies on average in the S&P 500.

Such concerns are a far cry from a year ago when surging sales of iPods, iPhones and iPads, as well as investor euphoria, propelled Apple to become the biggest-ever U.S. company by market capitalization.

Now, worries are rising about slowing sales of its marquee products and whether the company can continue to innovate and enthrall its fans without the vision of its co-founder, the late Steve Jobs.

Mr. Sacconaghi predicts Apple is set to enter what he calls "growth purgatory," an inevitable shift that occurs when a company becomes so big that it can no longer increase earnings at the same rate that investors had become accustomed to. Growth investors also likely sell at a faster pace than value investors buy. That disconnect can last for months or even years, pressuring the share price.

"For Apple, our belief has been growth investors were saturated and the company needed to attract value investors," Mr. Sacconaghi said. Apple started paying a regular dividend last year, which may help, but the company may need to boost that payout or announce a bigger stock buyback to attract more investors, he said.

According to Mr. Sacconaghi's research, investors seeking growth have been moving out of Apple for the past year. To some extent, value investors have moved in to replace them, he said. In December 2011, some 82% of growth funds in a sample of more than 800 U.S. mutual funds with more than $1 billion of assets owned Apple. On average, they owned more Apple shares than their benchmark index.

These days, that figure is 77%, and on average they own fewer Apple shares than their benchmark index, according to Mr. Sacconaghi.

Among value funds, 40% own Apple, compared with 29% in December 2011. On average, they own fewer shares than their benchmark index.

Brian Lazorishak, portfolio manager at Chase Investment Counsel, which manages about $500 million, said the firm's Chase Growth Fund trimmed its holdings of Apple in the fourth quarter.

"If it wasn't Apple, we'd find it pretty attractive," he said. "But because it is Apple and everybody knows the story and knows the products, it gives the stock an extra level of scrutiny that otherwise wouldn't be there."

Still, a blowout earnings report next week could spark a shift in sentiment, some investors said. And so many investors are betting against the stock, that any gains could force them to buy back stock to cover their bets, creating a "short squeeze" that could propel the stock even higher, they said.

Others said concerns about Apple's earnings potential are overblown.

"It seems like there's an avalanche of pessimism about the Apple franchise," said Channing Smith, a portfolio manager at Capital Advisors in Tulsa, Okla., which has about $1.1 billion in assets under management and has owned Apple shares since December 2009. "We just don't think it's warranted."

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